Prepayment
Analysis
by Dan Szakallas
Prepayments rose sharply in March, as expected. Low rates during the March refinance window coupled with the seasonal rise in home sales caused speeds to jump significantly. FNMA 30-year prepayments for 5.0’s, 5.5’s, and 6.0’s rose by 41%, 39%, and 32%, respectively; the largest increase seen in a long time. FNMA 15-year prepayments also posted large increases from February, moving by 36% and 31% for 4.5’s and 5.0’s, respectively. Large jumps were also seen in the GNMA sector, especially in the 4.5 coupon bucket, which increased by 36% from February. The coupon range of 4.5 to 5.5 continued to remain noticeably faster than the FNMA counterparts. Actual pool CPR speeds of selected coupon buckets along with corresponding model forecasts are shown in the table below.
FNMA 15 |
FNMA 30 |
GNMA 15 |
GNMA 30 |
|||||
Coupon |
Actual |
Model |
Actual |
Model |
Actual |
Model |
Actual |
Model |
4.5 |
10.7 |
9.6 |
9.2 |
3.3 |
12.6 |
11.6 |
14.5 |
11.6 |
5.0 |
15.1 |
17.4 |
14.9 |
11.4 |
16.0 |
18.5 |
17.6 |
19.6 |
5.5 |
19.6 |
21.4 |
22.6 |
23.5 |
20.1 |
22.4 |
23.9 |
32.1 |
6.0 |
24.4 |
21.7 |
32.3 |
36.6 |
24.6 |
25.1 |
32.6 |
37.2 |
6.5 |
26.1 |
22.8 |
36.2 |
35.0 |
24.3 |
24.4 |
38.0 |
40.3 |
7.0 |
26.4 |
25.8 |
38.0 |
34.1 |
24.2 |
23.7 |
37.4 |
40.3 |
7.5 |
26.9 |
28.2 |
37.1 |
32.4 |
24.2 |
25.2 |
37.0 |
37.4 |
This is the first month of analysis that uses the new Andrew Davidson & Co. Prepayment Model v4.3.4a, with improvements made to both the GNMA 15 and 30 year models. Changes were made to increase prepayment speeds for the lower coupons because of the overall change in prepayment behavior of these GNMA coupons. Looking at model fit across types and coupons, the model was slightly faster than the actual prepayment speeds for FNMA 15’s by a balance weighted average of only 0.3 CPR across coupons. For FNMA 30’s the model was just slightly slow by a balance-weighted average of only -0.3 CPR. The changes in the GNMA 30-year model were noticeable, as the difference between actual and model for the 4.5 and 5.0 coupons decreased from an average of 6.8 CPR in February to just 0.45 CPR in March. This was also the case for the GNMA 15-year model, as the average difference for 4.5’s and 5.0’s dropped from 2.7 CPR in February to 0.75 CPR in March.
Shifting to the new version 5.1 prepayment model, we can see that the model is slightly slow for FNMA 30-year 5.5 and 6.0 pools, but has a better fit for the premiums.
FNMA 15 |
FNMA 30 |
GNMA 15 |
GNMA 30 |
|||||
Coupon |
Actual |
Model |
Actual |
Model |
Actual |
Model |
Actual |
Model |
4.5 |
10.7 |
9.8 |
9.2 |
6.3 |
12.6 |
11.0 |
14.5 |
11.6 |
5.0 |
15.1 |
14.4 |
14.9 |
11.4 |
16.0 |
14.8 |
17.6 |
15.7 |
5.5 |
19.6 |
20.8 |
22.6 |
18.5 |
20.1 |
19.5 |
23.9 |
24.7 |
6.0 |
24.4 |
24.5 |
32.3 |
31.0 |
24.6 |
23.7 |
32.6 |
34.7 |
6.5 |
26.1 |
25.4 |
36.2 |
34.9 |
24.3 |
24.8 |
38.0 |
44.3 |
7.0 |
26.4 |
25.5 |
38.0 |
36.7 |
24.2 |
24.3 |
37.4 |
45.1 |
7.5 |
26.9 |
26.6 |
37.1 |
36.4 |
24.2 |
23.8 |
37.0 |
41.5 |
This month the model was just slightly slow for most coupon buckets across collateral types. Looking at the different pools, the model performed the best for the FNMA 15-year pools, off by a balance-weighted average of just -0.4. For the FNMA 30-year pools, the model was slow by a balance-weighted average of -3.1 CPR across coupons. The GNMA models were also only slightly off, as the 15-year model was slow by a balance-weighted average of -1.0 CPR, and the 30-yr model was actually fast by a balance-weighted average of 1.6 CPR across coupons, mostly due to the fast speeds seen on premiums. We are currently working on some new features for this model and hope to release a new version next month.
The March speeds jumped about 10% more than expected. This could be because there are 4 more business days in March compared to February, giving lending institutions more time to process refinance applications. Also, the pick-up in seasonal home sales is evident when looking at the increases seen in the discounts, as they jumped about 30% to 35% in March. However, we do not expect this spike to continue, as rates have risen consistently since the March refi period. From mid-March into the first couple weeks of April, 30-year rates rose to 5.50%, so we should see a drop in the prepayments for the month April for the low premiums and current coupon loans, while there should be almost no change in the discount sector as seasonal home sales should drive these prepayments.